Automobiles

QUESTION: Paul asks Dave if he has a mileage limit rule when it comes to purchasing used vehicles.

ANSWER: No, not really. What I try to determine, in an overall sense, is whether or not the car is run down to the point it will give me trouble.

Inexpensive, cheaply made cars have a greater likelihood of being worn out by high mileage. A 100,000-mile Dodge Neon would be a little different than a 100,000-mile Mercedes. Of course, a lot depends on your budget, too.

Fewer miles is always good. But generally speaking, the more of an “economy car” you’re looking at, the more the miles would have a negative impact. What you’re looking for is dependability, and how much life is left in the vehicle.

QUESTION: A follower on Twitter asks Dave for his opinion of used car warranties. Dave explains he is not a fan of extended warranties in general, and he especially dislikes used car warranties.

ANSWER: I never recommend extended warranties. Used car warranties are especially bad, because they’re expensive. I advise self-insuring for that sort of thing by saving an emergency fund of three to six months of expenses.

Only about 12 percent of what you spend on an extended warranty goes to cover the cost of repairs. That means around 88 percent is profit, overhead, and commissions. They make a lot of money on that, and you, on average, benefit very little. A lot of used car dealers make more money on the warranties than they do on the cars.

Brandon and his wife are in good shape financially, but they're worried about retirement. They ask Dave if they should use $22,000 they saved for a newer car, or hang on to some of it for when they retire. Dave assesses their overall situation, and gives them his opinion.

QUESTION: Brandon and his wife are 31 years old. They have no debt except for their house, and they also have an emergency fund and college savings in place. They’re motivated to save for retirement, so they’re also investing 15% of their income. They make around $100,000 annually and have $50,000 in their nest egg. Now, they’ve saved $22,000 for a newer car. Brandon wonders if they should spend the entire $22,000 on a car.

ANSWER: At 31 years old, you’re going to be more than fine for retirement if you keep doing what you’re doing. A $22,000 car is not unreasonable. You have your emergency fund in addition to your nest egg and car savings, so I’d buy the car.

You’re doing all the right stuff. Your kids are going to school debt-free, and you’re going to have the house paid off in no time. Chances are you’re going to retire a multi-millionaire at the rate you’re going if nothing changes. If things get better, and most people’s incomes go up throughout their lives as a general trend, then you’re going to make and invest even more money. You could have $5 million to $10 million, dude. You’re going to be in great shape!

QUESTION: Kendall calls in from Midland, Texas, with a question about the Baby Steps. He has $2,000 in his emergency fund, but he’s also worried he may lose his job. During the call Dave learns that he also has nearly $90,000 in debt on two cars that he’s upside down on. Kendall made $186,000 last year, but Dave urges him to sell the cars immediately.

ANSWER: You’ve got to get these cars sold! Go to Kelly Blue Book.com, and find out what the cars are really worth. Then put them up for sale through a private sale. You’ll get thousands more selling them that way than a dealership will give you. You’ll have to talk to your local credit union or bank for a small loan to cover the difference, too, plus a little bit more so you can drive a couple of little beaters for a while.

But dude, you’ve got close to $100,000 in car debt here. That’s a disaster! Just think how things would be without these car payments. Your entire life would change! Hopefully, you’ll be able to keep your job, but the car debt scares me more than anything else you’ve told me.